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For the first time in three years, the interest rates on Federal student loans will decrease anywhere from seven to ten percent depending on the loan type. This will take effect for new Federal student loan borrowers after July 1, 2019.

Federal student loans are typically the lowest cost borrowing option for students, and these interest rate decreases will make paying for college slightly more affordable for many.

Rate changes only occur for new borrowers, and the interest rates are announced once a year. Given that these rates are fixed for the life of the loans, a decrease can be beneficial for a long period of time.

Photo Credit: Getty

Getty

New Federal Student Loan Rates For 2019 - 2020

From July 1, 2019 to June 30, 2020, the rates on Federal student loans will be:

These represent a sizable decrease in interest rates. Previously for 2018 - 2019, the rates were:

Undergraduate Subsidized andUnsubsidized Direct Loans:5.05%

Graduate Direct Loans: 6.6%

Graduate and Parent PLUS Loans: 7.6%

The makes the rate decrease anywhere from 10% for undergraduates, to 7% for Grad and Parent PLUS Loans.

Why Rates Are Falling

Interest rates on student loans are tied to the government's cost to borrow. The May Treasury auction serves as the benchmark for rates for the following year. Whatever interest rate is set for the 10-year note is used as the baseline interest rate for student loans.

Given that this year's auction resulted in a substantially lower yield than last year's, we see student loan rates decreasing.

After the basic price for the 10-year note are factored in, the Department of Education then adds an additional rate which covers their expenses.

You can find the Department of Education's methodology for calculating student loan rates here.

Finally, Congress does set overall caps on the interest rate that can be charged, but we are not close to these levels yet.

Private Student Loans

The rates above are what are charged for Federal student loans, not private student loans. The interest rates charged by private student loans are set by the individual banks, and sometimes are even better than the Federal loan interest rates.

However, private loans don't offer a lot of the features of Federal loans, such as income-driven repayment plans, student loan forgiveness, and more. As such, simply looking at the interest rate doesn't take into consideration the whole picture about where to borrow.

Overall, this is positive news for borrowers. Given that student loan interest rates have decreased, borrowers can expect to see savings on the total cost of their education.

Credible estimates that the average borrower will save anywhere from $199 to $805, depending on the type of loan they have. That is a substantial savings that can help cover other expenses that college students face, such as rising textbooks costs, supplies, and more.

I'm a personal finance expert that focuses on helping millennials get out of student loan debt and start investing for their future. I also help parents make smart

…

I'm a personal finance expert that focuses on helping millennials get out of student loan debt and start investing for their future. I also help parents make smart choices about college financing options and navigating the complex world of paying for school. I started The College Investor in 2009 as a forum to discuss the myriad of financial issues facing young adults. I majored in Political Science at UC San Diego, and received my MBA from the Rady School of Management at UC San Diego.
To learn more about me, go to TheCollegeInvestor.com, or follow me on Twitter @collegeinvestin.